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The Macau Metro Monitor.  December 14th, 2009.



SJM Holdings will open Macau’s 34th casino tomorrow in an attempt to take a larger share of the mass market.  Following an investment of HK$1.5 billion, Casino Oceanus is set to open with 260 mass-market gaming tables and 560 slot machines spread over three floors and 32,000 square meters.  2,400 people will work at Casino Oceanus.  With no VIP service and no junket operators, and a direct connection to Macau’s main ferry terminal through a covered footbridge, Oceanus is, according to SJM chief executive Ambrose So Shu-fai, targeting “pure mass market”. 


Regional markets laid an egg in November with same store revenue down 7%, and that’s without the gas headwind.



We estimate that same store revenue in the regional markets declined 7% in November (only LA and MS haven’t reported).  November 2009 did contain one fewer Saturday but the comparison (-4%) wasn’t exactly difficult.  Combining October (one extra Saturday) and November yields a y-o-y decline of 4%.


Given October’s decent performance, many analysts are undoubtedly disappointed.  Other consumer sectors fared better in November – retail sales were surprisingly strong – which furthers the trend of gaming underperformance.  Gaming continues to face a combination of soft discretionary spending and a declining share of the discretionary wallet (see our 10/19 note “THE DOUBLE PCE WHAMMY TO GAMING”). 


Add a third negative factor to the mix:  gas prices.  As shown on the following chart, y-o-y gas prices will be up significantly in December and this headwind will persist through the first quarter at least.  Changes (y-o-y) in gas prices have historically been a statistically significant driver of gaming regional gaming revenues.  That’s bad news for the regional gamers already facing other headwinds.


AS EXPECTED, NOV DISAPPOINTED THE ANALYSTS - regionals vs gas projection


What does this mean for the stocks?  The regional gaming stocks have underperformed the market as can be seen below.  The stocks are not overly expensive but 2010 numbers probably need to come in.  Until they do, it’s hard to make a strong bull case for the group.



The Week Ahead

The Economic Data calendar for the week of the 14th of December through the 18th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - wa14 1

The Week Ahead - wa14 2

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Confidence Economics – THIS IS NEW

In the past month, we witnessed the DJIA holding above 10,000, President Obama’s new strategy for the war on terror, a "less bad" unemployment rate at 10.0%, and more than enough holiday commercials!


Surprisingly, confidence among U.S. consumers increased in December for the first time in three months.  However, current sentiment remains well below indices from more prosperous times.


The Reuters/University of Michigan preliminary index of consumer sentiment rose to 73.4 in December, from 67.4 in November.  The December figure exceeds the average of 65.0 for the first nine months of the year.


Contradicting some of my thoughts earlier in the week, the U of Michigan’s measure of CURRENT CONDITIONS (which reflects a slightly better job market) jumped to 79.1, from 68.8 in November and is the highest level since March 2008.   The index of EXPECTATIONS index also  increased to 69.7 from 66.5 last month.


As you can see from the chart below, confidence clearly appears to be settling in at a higher level.  This is just a preliminary number from the U. of Michigan survey, and the final number will likely be lower, but that is less important. 


Better consumer sentiment and improved retail sales numbers are leading to a breakdown in the RISK trade.  Positive MACRO data out of the US traditionally suggests the RISK trade will outperform.  Right now we are seeing a strong dollar with stocks up, led by the low beta Utilities (XLU). 


The breakdown in the inverse relationship between the dollar and risky assets is NEW. 


Howard Penney

Managing Director


Confidence Economics – THIS IS NEW - um

China: Is That It?

Overnight we were issued a whole new round of Chinese economic data. Since equity markets in Asia have started to lose their upward price momentum this week, I am left asking myself whether that’s it? The leading indicator in answering this question (the Shanghai Composite Index) closed down on the “news”…


In the chart below Matt Hedrick and I contextualize what the Street is labeling as “better than expected” Chinese export data. While, on the margin, the export data continues to improve sequentially, all we have really observed here is a rally to lower-highs.


We understand that China is not all about exports (34% of GDP). On the internal consumption front, we actually saw monthly Chinese Retail Sales slow sequentially as well (from 16.2% in October to 15.8% in November).


The red arrow in the chart shows the series of lower-highs we have seen in Chinese Exports since export demand was white hot (2006-2007). You can look at this chart in two ways: 1. A rally to a lower high (bearish) or 2. A pending breakout to the upside (bullish).


While negative year-over-year export growth of -1.2% in November is not absolutely bullish, what has been bullish is what we have seen on the margin in China since her 2008 lows. However, in terms of export recovery, THE question remains: Is that it?


If the Chinese local A-shares were not making a series of lower-highs and if the H-shares on the Hang Seng Index were not breaking down from an immediate term TRADE perspective, I would give this Chinese Export chart the bullish benefit of doubt. For now, I am paid to be skeptical. Market prices don’t lie.


There are plenty more bulls in the China shop today than when we got bullish (December of 2008), to be worried about.



Keith R. McCullough
Chief Executive Officer


China: Is That It?  - chinaex

Shares At Risk

“If I had lived through the Depression, I would have been in a better position to understand events.”
-John Meriwether
In 1994, John Meriwether founded a company called Long Term Capital Management. It’s a good thing that the Salomon guys didn’t focus much on Long Term Financial History back in the 90’s. Heck, who would have ever made a Billion Dollars if they actually had some historical context?
Without Goldman’s very own Fisher Black (Black Scholes Options Pricing Model) selling academia, Washington, and Wall Street on “Value At Risk” as a risk management concept, where would this fine nation of Perceived Financial Wizardry be?
Not that I (or history) has kept track, but Meriwether went to business school with a guy named John Corzine. The man formerly known as the Governor of New Jersey (Corzine) became CEO of Goldman Sachs in 1994 (the year LTCM launched) and his successor as GS Chief, Hank Paulson, was co-head of Investment Banking, then, COO of GS from 1994 to 1998.
Only to be outdone by Paulson’s leverage ratios at GS in 2006, Meriwether eventually levered up $7 Billion by a factor of 19:1 in 1997. Then, tick-ah-teee-booom! All of that Perceived Value was at risk. LTCM blew up and the Corzine/Paulson show moved on to careers in the arms races of nuclear national and state leverage.
This morning we are waking up to another Goldman concept. This one is more populist than capitalist in nature. The bankers are calling it “Shares At Risk.” As opposed to a “10-sigma event” that the Salomon, Goldman, and LTCM guys said couldn’t happen 1998, I actually understand this one. Having built my own financial company in the shadow of their creative destruction, I definitely get the partner capital at risk thing. Unfortunately, that’s not what this is.
Getting paid is cool. But having to make up stories to justify why Government Sachs has a Geithner Put, and calling that next gen-American Capitalism is a bit much. I appreciate your bravery and all that, but I would have just taken the cash comp as opposed to the political compromise.
“Shares At Risk” are what Goldman’s top 30 employees on the management committee get for the next 5 years. Bonus compensation in stock, not cash. This what they get for taking state capital. This is the real price. Goldman is now officially, The System.
Re-Regulation of The System is next. Alongside a +2% US Dollar rally breaking the back of REFLATION trades in both Energy and Financial stocks, this is one of the main reasons why GS has broken its intermediate term TREND line of $174/share.

Per Goldman’s definition, “Shares at Risk” now include “an enhanced recapture provision” that will let the committee take away an employee’s shares if that GS employee is engaged in “materially improper risk analysis or failed sufficiently to raise concerns about risks.”

Ok. So what does that mean?


To me, that means that Goldman will never be able to take on the risk and/or government sponsored leverage ratios required to drive themselves back to past peak profit margins. The peak returns for this company are now going to be etched in stone. This is evolution. Private Partnerships are now finally going to be allowed to beat Goldman in their own back yard. Sorry guys – this is the price for taking state capital.


That’s all I have to say about that. Let’s get going this morning with giving The New Reality some risk management levels “to raise concerns about”:


1.      Alongside intermediate term TREND line breakdowns in the price of GS, BAC, and C, the XLF (US Financials Sector) continues to break down

2.      The intermediate term TREND line for XLF = $14.67, and the long term TAIL line of support for the XLF is all the way down at $12.09 (-15% lower)

3.      The inverse correlation between US Dollar Index and the XLF remains very high. The USD has made a bullish move above its TRADE line of $75.32.

The math argues that Mr. Macro Market has been pricing in a Lloyd Blankfein capitulation for the last few months. In the last 3 months, the SP500 is up +5.6% and the XLF (US Financials) is down -2.3%. Yes, in risk management speak, that’s called -790 basis points of negative performance. GS peaked for the YTD on October 14th (it’s down -14% since). Both the stock market in Greece and the United Arab Emirates peaked on that same day, and have since crashed. Irony?


Away from the American Citizenry getting some visibility that we may be seeing an end to the US Government financing banker bonuses on the short end of the yield curve (i.e. financing those bonuses with American Savings), there are other important bullish signals appearing for the Bombed Out Buck:


1.      The Fed’s Balance Sheet actually contracted by $18B this week. That’s one of the largest week-over-week contractions in months.

2.      Next week’s Consumer Price Inflation data (for November) is going to show another sequential rise in inflationary pressures (hawkish Fed data point)

3.      US Treasury yields on the long end of the curve are starting to breakout. I have the intermediate term TREND breakout line for 10-year yields at 3.4%.

I suppose it’s only fitting that on the day after Goldman moving to illiquid compensation that the steepness of the Piggy Banker Spread (the Yield Spread, which is 10-year yields minus 2-years) is setting up to make a lower-high. This morning, with 2-year rates at 0.78% (right at its immediate term TRADE line) and 10-year rates at 3.50%, the Piggy Banker’s have a +272 basis point spread to chow down on. That’s only 4 basis points from the widest spread EVER.
Ever, of course, is a long time. I guess this is the most politicized decision Goldman has ever had to make too. That’s why their share price is at risk of breaking down.


Our new Sector Head for Financials, Josh Steiner, and I are going to be hosting an 11AM EST conference call to go through many of the topics I grazed over this morning. If you’d like to listen in, email


My immediate term support and resistance lines for the SP500 are now 1093 and 1112, respectively.


Enjoy your weekend and best of luck out there today,



EWZ – iShares BrazilAs Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil’s commodity complex and believe the country’s management of its interest rate policy has promoted stimulus.


XLK – SPDR Technology We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

EWJ – iShares Japan
While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30 and 12/2.

– iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic

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